Energy management meets risk management

After several years of uncertainty in wholesale energy prices and the continued political drive to tackle climate change, management of costs and consumption is emerging as a new business discipline. Forward looking companies are now applying this mindset to the entire energy procurement and consumption process to improve energy efficiency and manage risk, rather than focus on individual elements of business operations. Douglas McLeish, Head of Business Development, npower business, details how this convergent thinking can help companies deliver against economic and environmental targets.

Events over the last few years have changed how companies regard energy. Historically when wholesale prices were lower, energy was viewed as a minor concern; a price-led decision based on fixed price arrangements with little call for energy management. In today’s business reality, rising wholesale costs have added a great degree of risk to purchasing and led to energy management moving centre stage as an effective means to mitigate costs.

Recent research by npower business, the third npower Business Energy Index (nBEI), further underlines how energy costs remain a concern for UK businesses and how important energy management is becoming.

The report found that the majority of respondents (60%) had experienced an increase in costs over the last six months, a consistent trend since the nBEI began 18 months ago, with an average increase of over 40%.

This is perhaps not that surprising as supply and demand issues continue to dominate the energy agenda, causing unprecedented wholesale prices and price volatility. Many of the supply issues, such as the shift from the UK being an energy self-sufficient nation to an energy dependent one, remain prevalent. In addition, demand issues such as the burgeoning economies of the Far East are also contributing to the impact on global wholesale energy costs.

Depending on their competitive position some companies are able to pass on some or all increased costs in the form of higher prices. Some companies find this more difficult and are changing their operations and processes to reduce energy consumption and their exposure to the problem.

As far as energy efficiency is concerned, the latest nBEI report reveals that most companies have taken steps to improve energy efficiency in the last six months and respondents have never rated the importance of energy efficiency higher. The most popular measures to improve efficiency were changing heating and lighting (46%) and asking for more information (46%).

Fuelled by rising prices, companies are demanding more sophisticated forms of energy procurement and consumption management. As a result, risk management has come increasingly to the fore as companies look to new ways to mitigate rising economic and environmental challenges.

The principles behind risk management are the same as behind many of the commodity markets across the world. Essentially companies are hedging a portion of their energy needs in line with their strategy through considerably more flexible means. For example, a modern supply contract may now have 24 buying points a year; a far cry from traditional annual or bi-annual spot purchasing patterns.

This flexibility means a company can take advantage of short-term movements in the markets to bring long-term benefits, by purchasing several months’ usage when daily prices are favourable.

The current situation around energy is also broadening the scope for risk management. While many companies are now embracing a more flexible approach to purchasing, others are drawing this closer to energy consumption too. After all, saving energy is a form of risk management because if less is consumed, then less is required and the exposure to risk is thereby reduced.

This approach requires a more integrated mindset to consider both supply and demand side management issues; all the actual costs of running the processes that require energy, rather than focusing purely on procurement (see figure 1).

This strategic approach to energy is an evolution from the traditional tactical response. Combining a more sophisticated procurement expertise with intelligent energy management offers substantial cost and carbon savings. It also moves energy management on from purely an operation and maintenance exercise.

The more sophisticated forms of procurement offer companies a greater flexibility, but also gaining an understanding of energy consumption is an essential pre-requisite to energy management. Establishing when, where and how energy is being used will inform energy efficiency strategy and guide the hand of activity. By assessing the energy efficiency of business processes, the costs of operation and maintenance and other associated expenditure, alongside purchasing costs, you begin the process of true risk management.

In terms of demand side management, the latest nBEI results indicate a tendency for companies to look to the solutions that require less time and resources. Regardless of the size of an organisation, auditing consumption across all business operations will highlight areas for improvements in energy efficiency. Some of these will be low cost options, such as educating staff on environmental benefits; some will require substantial investment, such as the overhaul of building management systems; some may even require outsourcing of energy management to specialists. Effective energy efficiency must go beyond the simple, easy measures and companies need to grasp the nettle and take a longer term view of the benefits of investing in energy management.

While there are compelling economic arguments for investing in energy management, many businesses are also increasingly concerned with demonstrating sound environmental performance by controlling the impacts of their activities, services and also products on the environment. Stricter regulations and legislation, plus a need to report environmental performance to appropriate stakeholders, has resulted in many organisations integrating environmental management systems into their corporate structure.

Corporate Social Responsibility reports are becoming more widespread, and the uses of organisational tools, such as ISO 14001, provide a framework for managing environmental responsibilities.

Both EU and UK Government policy indicates that energy efficiency and energy saving targets will remain prime political objectives. It is not only the large organisations, particularly the big energy consumers that are affected by these various legislative instruments. Other business sectors are being targeted with stringent controls such as public sector bodies.

Energy management and energy efficiency are becoming established practices, but, for many organisations, they have remained outside the core of business management practice, and not regulated by legislation. Initiatives, such as the EU Emissions Trading Scheme, are causing carbon management to emerge as a new cultural discipline.

For companies looking to address economic, political and environmental factors, adopting a more holistic approach to energy is to be advised. Economically, there has been a step-change in fundamental energy costs for the UK and Europe. Over the short-term this situation is unlikely to change as the underlying factors behind the increase remain dominant. In the medium term, there are initiatives underway such as improvements to UK gas supply infrastructure that should offer some respite. Yet, recent events including global political unrest and issues surrounding UK gas infrastructure, have raised concerns and nervousness as to the long-term outlook for UK energy supplies.

With wholesale costs offering little respite and additional environmental pressure now being applied to companies to embrace the drive to the low carbon economy, risk management is emerging as the best means for companies to meet their own, and society’s requirements and expectations.